Israel approves revised war budget extending reliance on debt

Israel’s parliament approved a 2026 state budget with a large defence supplement to cover the war with Iran, to be funded by additional borrowing and cuts in civilian spending.

The spending plan, approved by Knesset lawmakers early Monday in a vote of 62 to 55, totals 699 billion shekels ($222 billion) and sets a deficit target of 4.9% of gross domestic product.

Defence is the largest item at 143 billion shekels — about 120% higher than in 2023, before the war in Gaza. An additional 6 billion shekels was placed in reserves for Iran war-related costs or other military needs, bringing the supplementary defence budget to at least 38 billion shekels, or almost 2% of GDP.
The extra money is mostly for replenishing Israel’s military inventory and to pay reserve soldiers.

The US-Israeli war with Iran is in its second month after President Donald Trump extended a deadline to April 6 for Tehran to agree to reopen the Strait of Hormuz or have its power plants demolished while massing US troops in the region.

Israel is fighting Iran-backed Hezbollah at the same time in Lebanon, taking hold of an extended buffer zone at Prime Minister Benjamin Netanyahu’s orders.

“This war is costing lots of money,” Netanyahu said in a video statement last week, “Therefore, we need a special budget, including tens of billions of shekels to boost defence expenditure.”

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The swollen defence budget will be funded by a larger deficit, which was lowered from an anticipated 5.1% of GDP after Israeli banks agreed to pay a one-time levy of some 3 billion shekels into state coffers.

Other sources of funding include a 10 billion-shekel surplus in state revenues and a 3% flat cut in civilian government ministries.

Government borrowing soared after Israel’s military retaliation against an October 2023 attack by Gaza-based Hamas militants, peaking at almost 280 billion shekels in 2024.

To win support for the budget, Netanyahu shelved several bills that were causing frictions within the governing coalition, including a highly disputed measure that would exempt ultra-Orthodox men from serving in the military.

Finance Minister Bezalel Smotrich gave up a reform of Israel’s state-regulated milk industry that he argued would ease the cost of living.

‘War is a time for unity, for national responsibility,” Smotrich said alongside Netanyahu last week.

The budget approval grants Netanyahu’s cabinet a lifeline, as failure to approve it by March 31 would have meant an automatic collapse of the government under Israeli law.

The budget legislation package includes tax exemptions for returning Israeli expatriates and Jewish immigrants in an attempt to counter war-triggered brain drain, tax benefits for middle-class employees, and corporate tax waivers for research and development aimed at tech companies.